Oil and the challenges of the 21st century

Let me begin by expressing the regrets of the President and Secretary General of OPEC, HE Dr Purnomo Yusgiantoro, who is unable to attend the 5th International Oil Summit personally. Dr Purnomo, who is also Indonesia’s Minister of Energy and Mineral Resources, has asked me to speak to you on his behalf on the topic of “Oil and the challenges of the 21st century”. He has directed me to convey his thanks to the organisers for this kind invitation and wishes all those involved every success with the Summit.

As we settle into the new century, we are beginning to get a clearer image of the challenges that will face the oil industry in the coming years and decades. There is broad consensus on the projection that energy demand will continue rising in an era of increasing globalisation, rapid communications and continued advances in technology, but that consumers will want this energy to be as clean and as safe as possible, as well as integrating itself fully into their plans for sustainable development and economic growth.

There is also consensus on the contention that, of the world’s five main commercial energy sources, oil will maintain its present leading role well into the 21st century.

Currently, oil accounts for around 40 per cent of the energy mix. This is because it is a unique commodity, with a combination of attributes which far exceeds that of any other energy source — sufficiency, accessibility, versatility, ease of transport and, in many areas, low costs. These have been complemented by a multitude of practical benefits that can be gained from decades of intensive exploitation and use in the industrial, commercial and domestic fields. Also, advances in technology continue to make oil a cleaner, safer fuel, so that it can meet increasingly tighter environmental regulations, as well as conforming to the broader demands of sustainable development.

The world’s proven crude oil reserves total around 1,100 billion barrels, which, in simplistic terms, will be enough to meet demand for around 45 years, at current production rates.

Oil will remain the dominant energy source, in spite of the fact that, over the past decade or so, it has come under pressure on environmental grounds, particularly in the context of the UN-sponsored climate change negotiations. This has come on top of longer-standing efforts among some consuming nations to diversify energy sources away from it, on so-called “strategic grounds”.

Projections from the reference case of OPEC’s World Energy Model, “OWEM”, suggest only a marginal dip to 38 per cent in oil’s market share in the period to 2020. In absolute terms, world oil demand is forecast to rise from 76 million barrels a day in 2000 to 106 mb/d in 2020 — that is, by around 39 per cent.

The closest rival to oil during this period will be its fellow hydrocarbon, gas, which has a more favourable environmental profile. However, our reference case shows that, even though the use of gas will almost double in the period 2000–20 and its share in the global energy mix will rise from 23 per cent to 28 per cent, this will still be ten percentage points below the share of oil. So there is a very positive outlook for oil in the foreseeable future. It will be the task of the oil industry, therefore, to ensure that oil realises its full potential on world energy markets in the years and decades to come.

While this is a task which should be handled on an equitable basis by all parties in the market, quite clearly a heavy burden will fall upon OPEC producers. This is partly because of our Member Countries’ strong resource base and partly because of our successful track record with market-stabilisation measures.

Our Member Countries possess around 80 per cent of the world’s proven crude oil reserves — totalling nearly 850 billion barrels — and there is a reserves-to-production ratio of more than 80 years. These reserves are much more economic to access than those in other, high-cost regions of the world. Therefore, our Member Countries have the reserve strength to cope with the forecast rises in demand in the coming decades.

OPEC has demonstrated repeatedly its commitment to achieving order and stability in the international oil market. Our production policies seek to ensure that the market is well-supplied with crude at all times and that oil prices remain at levels that meet the contrasting needs of producers and consumers. The limits of our oil price band — US $22–28 per barrel for our Reference Basket — have been carefully calculated with this in mind. If we find that prices are beginning to settle outside this range, or if, at one of our Ministerial Conferences, we are convinced that this is very likely to occur in the coming months, then we will reassess our Organization’s production ceiling and adjust it accordingly.

We take a great deal of care in doing this, and sometimes the conclusions we reach about a particular market situation are not immediately understood by all the other parties involved. A case in point has occurred over the past six months, at a time when average monthly prices have remained above our band. The fact that we have decided to implement a production cut of 1 mb/d, with effect from the beginning of this month, is due to our recognition, first, that the present high prices are not being caused by a shortage of crude and, secondly, that we are entering the second quarter of the year, when demand is traditionally low. Our concern has been that, in a market that is so easily influenced by psychological factors, we could suddenly find ourselves in a situation where there is the widespread realisation of substantial excess supply and that this dramatically drives down prices well below the minimum level of our band — as has occurred often in the past, a downward price trend can effectively feed on itself in a nervous, speculative market atmosphere and create its own damaging momentum. We would end up in a situation where prices would be well below fundamental levels, in just the same way that they are now above fundamental levels. The net result would be rampant volatility and this would be to no one’s ultimate advantage. It is, therefore, better to take preventive measures now, rather than wait until a major crisis occurs, when it would be much more difficult to remedy the situation. This is in line with the principal philosophy behind OPEC’s market-stabilisation measures.

To illustrate the success of our market-stabilisation measures, one need only look at the relatively high degree of price stability that has existed in the market in the opening years of this century, bearing in mind the chequered history of our industry. Early last year, for example, there was a three-pronged threat to price stability, with the crises that prevailed in Iraq, Nigeria and Venezuela, and yet, the market weathered the storm without major disruption and volatility, and this was very much due to the support it received from OPEC’s policies. Indeed, the first three full years in which OPEC’s price band policy was applied — 2001–03 — saw prices average $25.2/b, which was right in the middle of the band.

Let us not forget that the international oil market is inherently unstable — as history has taught us repeatedly — and that some form of stabilising activity is required, due to the colossal negative repercussions that price volatility can have throughout the world economy. Witness the events of the 1970s, 1986, late 1998/early 1999. A sound global economy is dependent upon stable energy prices. Sound national economies are dependent upon stable energy prices. Sound company finances are dependent upon stable energy prices. Crude oil accounts for 40 per cent of the global energy mix. If oil is jittery, energy will be jittery!

We have demonstrated in OPEC that it is possible to provide a high degree of stability in an inherently volatile environment. And the beauty of this — if it is done well — is that everybody gains! OPEC, non-OPEC, producers, consumers …

This is why we have called upon other parties in the industry to cooperate with OPEC in our market-stabilisation measures. We have been fairly successful in this over the past decade or so, as other responsible members of the international petroleum community have come to realise the universal benefits of such actions. Indeed, the success of our production agreements has depended heavily upon the support they have received from elsewhere in the industry.

Again, the situation is not a perfect one. There is still an element of crisis management about the willingness of some parties to cooperate with OPEC, when, in fact, there should also be a “sunny day” element, so that this very welcome and very necessary support remains even when the market is stable. This is because the market can quickly slip from stable to unstable, as we all know, and the stronger the defence mechanisms — the sustained defence mechanisms — then the more effective we will be in handling such situations.

But there is also a bigger issue at stake.

This is the fact that a stable, orderly oil market today provides the essential base for a stable, orderly oil market tomorrow — or, less poetically, in the years ahead. We believe, in OPEC, that it is the duty of all parties in the industry to ensure that the market meets not only today’s needs, but also copes in full measure with demand five or ten years ahead. In other words, I am talking about investment — investment in future production capacity. The starting-point for a sound investment strategy is order and stability today.

Investment in the oil industry has three elements to it. First, it must meet the forecast absolute increase in demand, which I outlined earlier. Secondly, it must see that exhausted reserves are replaced, as and when necessary. And thirdly — and this is a recently articulated concept, but, nevertheless, a very important concept — it must ensure that oil-producing nations always have sufficient spare capacity available to cope with sudden, unexpected shortages in supply.

We are talking about enormous sums of money here. Our projections indicate that OPEC Member Countries may need to spend nearly $100 bn by 2010 and as much as $200 bn by 2020 to meet the future demand for oil in full. The estimates for non-OPEC producers are multiples of this. It will require a concerted effort by the industry at large to attract these sums. This is perhaps one of the biggest challenges facing us today.

Here we find ourselves up against many obstacles. There are huge areas of uncertainty affecting the clarity and consistency of future world oil demand, and, clearly, the magnitude of these uncertainties increases as we venture further into the future. These uncertainties include changing regulations, fiscal regimes, strategic and political factors, evolving life-styles, natural disasters and, of course, human error. Countering these uncertainties requires transparency, consultation, meticulous planning and careful scheduling across the industry.

In conclusion, therefore, the challenges facing the oil industry in the 21st century are formidable and extend across all time-horizons. The world has enough crude oil to meet growing consumer needs throughout the early decades of the century, at least, and most of this resides within the borders of OPEC’s Member Countries. It is up to all of us to ensure that these finite resources are exploited in an efficient, effective and equitable manner both now and in the future, so that the world community at large can derive the maximum benefit from them.